Pound Sterling Surges to 2.0 Against Canadian Dollar as BoC Cuts Rates

The Bank of Canada (BoC) has cut interest rates further allowing the pound sterling to rocket to its best level since 2008.

The Canadian dollar exchange rate complex (CAD) fell sharply after the Bank of Canada announced an interest rate cut of 0.25% on the 15th of July 2015. Heavy falls against the euro, US dollar and a raft of other major currencies were noted.

The overnight rate is now at 0.50% bringing it closer to the US and UK interest rate ensuring any yield advantage that has in the past propped up the CAD against GBP and USD has now been eroded further.

The Bank says that economic growth fell below the forecast presented in the April 2051 Monetary Policy Report, with the risks to the inflation outlook having swung to the downside.

“The decision was largely the result of the economy slowing more aggressively than the central bank’s forecast released in the April Monetary Policy Report. Since the Bank’s April Monetary Policy Report, the economic outlook has proven to be weaker than expected, and the underlying trend rate of inflation, according to the Bank’s calculations, eased to between 1.5% and 1.7%,” notes Dawn Desjardins, Assistant Chief Economist at RBC Economics.

According to the BoC the output gap is “significantly larger than was expected in April” The slow growth backdrop created downside risks to the inflation outlook, thereby leading to the Bank’s decision to lower the policy rate today, marking the second cut this year.

• Following the decision the pound to Canadian dollar exchange rate (GBPCAD) is at 2.0200.
• The US dollar to Canadian dollar exchange rate (USDCAD) is at 1.2930.
• The euro to Canadian dollar exchange rate (EURCAD) is at 1.4184.

Note that the above are taken from the inter-bank markets, your bank will charge a spread at discretion.

An independent payments provider will however seek to get closer to the market rate and in the process deliver up to 5% more FX in some instances.

“The Canadian Dollar has dropped more than a full cent this morning against the USD after the Bank of Canada cut its key interest rate by 1/4% to 0.5%. Low prices for oil and other commodities as well as faltering global economic growth and a decline in Canadian business investment have led to the Bank of Canada to downgrade Canadian GDP for 2015 to 1.1% down from the 1.9% forecast just 3 months ago. The CAD is nearing 2008 lows,” says a note from Olympia FX in the wake of the BoC event.

Factory Sales Disappoint

Just to emphasis how soft the outlook has turned for Canada official statistics showed Manufacturing sales for May came in at +0.1%, below the +0.3% expected by economists.

This is an improvement on the previous reading of -2.2% which is itself a revision down from -2.1%.

Giving his view on the data is Marc Pinsonneault at NBF Financial Markets:

“Setting aside the increase in the industrial product price index for petroleum and coal products and the change in the exchange rate, volume manufacturing sales declined in May for a seventh time in ten months, that is since the post-recession peak.

“Assuming no change in June, volume manufacturing sales are set to contract in Q2 for a third quarter in a row, something not seen since the last recession. This supports our view that the economy did not get much of a quarter after Q1’s surprising real GDP drop.”

The bottom line is the outlook for the Canadian dollar will remain under pressure until we start to see data improve.

We do believe it will improve with a rapidly improving US economy likely to ultimately support industry north of the border.

The CAD is forecast to fall further from here over coming months but a return to form in the longer-term is all but inevitable.